Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, good afternoon. Thank you for standing by. Welcome to the conference call of Marisa Lojas to release the results of the second quarter of 2020. This conference call is being recorded and will be available at Marisa's IR website. [Operator Instructions]

Before continuing, we would like to clarify that statements made during this conference call relative to Marisa's business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are no guarantee of performance because they involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that overall economic scenario, industry conditions and other operational factors may affect the future performance of Marisa, and may lead to results that be materially different from those expressed in such forward-looking statements.

Now we would like to give the floor to Mr. Marcelo Pimentel, CEO, who's going to start the presentation. Mr. Pimentel, good afternoon. Thank you for the opportunity. Please, the floor is yours.

[Marcelo Pimentel, executive]

Thank you. Good afternoon to everyone, and welcome to the conference call on the second quarter 2020 of Marisa Lojas S.A. So today, I have our CFO, Adalberto Santos; our IR Officer, Lara Razza.

The second quarter was marked by the stop of retail activities. As announced, the company concentrated its efforts in order to preserve the physical health of its workers, the maintenance of communication with our customers and the preservation of operational conditions of the business with special focus on reinforcing our capital structure. In April, we had the gradual reopening of our store chain. And at the end of the quarter, had 241 units in operation. Today, we have practically 100% of the whole chain operational. It's important to highlight the logistic effort that was imposed to our teams in this period. Consider that although operational or store chain was faced with many limitations in work hours, opening hours and they opened and closed back and forth. The company is still focusing efforts on executing strategic projects with our highlights to the acceleration of its digital operation with significant advancements such as the advancement in consolidation of Ship from Store with a 20% of total revenue during this period and increased product availability of 40% as compared to the traditional volume that came only from our e-commerce DC. The click and pick up in all open stores with a repurchase process, which during the pandemic, went up to 33% of all customers who come up to pick up orders from our stores.

We launched our app in June. We have more than 800,000 downloads, 10% of the access's total of our digital sales come from our app. And it's already demonstrating indications of improvements that are significant, such as navigation time, 64% greater in the app, and the conversion rate is 40% greater in the app than in the -- with the new app as compared to the traditional app. During this period, we have also launched the digital sales program. And today, we have more than 2,000 employees already registered. We had an underwear launch with a new dedicated channel in our key category with special content being produced. We have the objective of reaching our fair share in the underwear digital market.

Today, underwear accounts for twice as much share in total digital sales confirming our strategy. In marketplace, we're strengthening our strategy of being present in the main marketplaces of the country. And in July, we had revenues record in digital stores. This quarter, we launched the new house or fashion -- home fashion in our digital channels. We believe that we are meeting the needs of our customers, and have another opportunity of incremental sales for Marisa. So we started the sales [ kind of ] through the Whatsapp and a soft launching in some of our stores. Now all these projects are important, strategic and relevant and all of them advanced, such as the launch of the new store model, the opening of the pilot called Shopping [indiscernible] store last July. Once approved, this model is supposed to be used the next renovation and openings that the company will make.

Moreover, and we have recovered the openings of Magalu stores. Today, we have more than 77 kiosks in operation, and we should get to 300 before the end of the year. The company has also decided to advance in a structural review of our SG&A with a revision of 100% of our contracts using home offers for our headquarters. And also an automation project for repetitive activities in all departments of the company. We have also accelerated the structural organization of our inventory that was originally programmed to take place gradually until December and then started being executed right after the reopening of the stores.

The initiative in addition to making it possible then providing us a differential and a quite competitive scenario helps us to assure robustness in cash, the reinforcement of SMB portfolios and also should help us to recover margin.

Finally, I would like to close highlighting the sales performance during the period. Digital operation has grown in an accelerated pace everywhere reaching the mark of 113.1% in the quarter, with a significant share of Ship from Store, which accounts for 20% of our digital sales. In the physical store chain, in turn, in spite of all the difficulties in operation limitations, it has also had a performance that was above expected with an average of only 50% of the operational time available. The main highlight for our street stores was performance, keeps at an average that is 10%, above the performance of our shopping mall stores. And shows the potential for our regular operations for them to go back in addition to being an important lever for our digital operations.

In the month of July and August, the performance was even better. Our average operation time was 70% and sales performance is close to 90% as compared to 2019 with the differential in our store -- street store operations. So we're still focusing on special occasions. And they are important windows of opportunity for us to consolidate market. In that sense, we have focused our energy in increasing even further the operations, and to consolidate it as another important player in the fashion retail in Brazil. More than that, consolidating our multichannel strategy, we are working to establish ourselves as the portal of Brazilian women with a full range of products to meet all their needs.

Now I would like to give the floor to Adalberto Santos, our CFO, who is going to give you more details about the numbers of the period, and then we'll come back for all questions and answers. Thank you very much.

[Adalberto Dos Santos, executive]

Thank you very much. This is now Adalberto speaking. I'll give a bit more details, reinforced by our presentation. Now moving to Slide #2. There's more detail of our store reopening flow. So as you can see in April,

[Audio Gap]

Operating 50% of the time and in comparable basis, in a time that is available is comparable to the previous year. So the store is operating 20% in area available, we were able to deliver sales only 35% below on the average of the quarter as compared to the year before. This performance is better than we had initially estimated.

So as Pimentel had mentioned in the gradual reopening with working hours limitations. And then there were some stores that opened and then had to be closed again and opened back again. And all of this impacted everything, our sales and our teams. It's important to emphasize that throughout the period, we were able to have open operations, exclusively to receive invoices. And this was very important to keep the inflow of our cash and also for the health of our portfolio. It's important to highlight open operations for Ship from Store, it's important, as Pimentel said, to accelerate our digital operation.

On the next page, we see the evolution of sales that is very detailed. So sales had a drop of approximately 72.5%, more or less in line with other operations but if we look into more details, the line at the top, you can see digital operations growing, practically, every month with 141.3% in June and August, and the numbers that we have now are very similar. It's important to say that this is a growth over the basis of the year before. And this operation had already been growing significantly for a while when we replaced our digital platform in 2017 and in 2018, we started this acceleration of process.

In the line below, the dark line, this is the growth of our physical stores, comparable basis. So it started with minus 38%, minus 24% and then we had minus 38% in June. And then in July, minus 24.3%. And in August, we have approximately minus 10%. And combined, the number is already positive in total sales. And so we have the maintenance of the dynamics of acceleration in both channels in July and in August.

On the next chart, on the top chart, you have the gross profit and the margin with a drop -- with the reduction of sales, gross margin had a reduction of 14.4 percentage points due to the company's strategy of accelerating its inventory reduction. This is some movement that we had planned to do until December to increase sales to keep the same inventory levels. And we had a natural reduction during the year with a coverage reduction of 10%. With COVID, the company decided to change its strategy of accelerating the reduction. So accelerating by regaining market share in markets that were slightly more fragile to assure cash compensation with a healthy cash and also to assure our FPS portfolios. And as a reminder, this inventory reduction is very close to the level that we had ideally forecast for August.

As Pimentel had said, we had a significant reduction, 42% year-on-year. And more importantly than that are the projects being implemented, 3 initiatives to capture at least partially these reductions. So the projects were repetitive activities in many different departments of the company that are being automated. So between 300 and 400 robots. Home office will be officially implemented in the company and the reduction of 100% of the contracts is moving forward but very positive results so far.

On Page 5, on Slide 5, you can see the contribution margin of FPS. So in pink, you have PL plus P. Loan, and then in Green, co-branded. And you see that the reserve reduction of 65.5%. And in July and in August, we are going back to pre-COVID standards in terms of bad debt. The contribution margin had a drop of 28.9% for the co-branded. On the left, we have a reduction of losses of portfolio of the private label here on Slide #6, and the bars are percentage overdue over receivable as a reduction for this portfolio. The EEFICC, which is our credit collection efficiency index, in May, it was back to normal. And this is still like that in July and August, keeping our bad debt profile levels, it's close or very similar to pre-COVID levels. And after September, we are likely to have a reversal of additional bad debt that we had during the COVID.

On the next chart, here personnel loans. You can see the portfolio loss. So this is a mathematical effect and the face values of our overdue portfolio. They are very similar, even during the COVID crisis and pre-COVID, they are practically stable in absolute numbers of the overdue portfolio and EEFICC is already back to normal levels. They are close to pre-COVID levels, and they're all going back to normal. And then we have the evolution because of performance loss of retail operations for FPS.

On Slide #8, you can see the consolidated results. So minus BRL 170 million for this period. I'm on Page 10. The last chart, you can see operational cash or our cash flow, you can see the adjusted EBITDA is 173 -- minus BRL 173,000 (sic) [ BRL 173 million ]. So we had to raise working capital for the period in spite of that the company's cash is still quite robust, and now of BRL 308 million. So cash position is at a safe level, responding positively to initiatives to reduce cash burn. And then for the entire scenario until the end of the year, this -- it will be like that. So -- and this is basically all I had to say.

And now we are available for your questions and answers.

[Operator]

[Operator Instructions] We have a question from Helena Villares from Itaú.

[Helena Villares, analyst]

I have 2 questions actually. One is that you have just mentioned, Adalberto, that your inventory level is already close to what you would like to happen as you had originally planned? How much does it mean in terms of promotions or sales from now on? So this will impact your gross margin. So maybe you will see promotion levels and whether this is going to be slightly more normal in terms of gross margin. Still in terms of profitability. And so you were very efficient in terms of cost so it's 42% year-on-year. What we would like to hear is how much of that is structural? How much you're going to go back as you open stores and with a more normal operation? And how much this will be structural? And lastly, the last point is regarding FPS. You said that your bad debt level, your level is going back to normal in July and in August. But when we look at the portfolio, and -- so it's similar to the total. So when you see -- how do you see it in the future? So overdue? Over total? How are you going to do it? What's your outlook?

[Marcelo Pimentel, executive]

Thank you, Helena. We are going to divide the questions between me and Adalberto. So first thing, regarding inventory. So we had, pre-COVID, an expectation of reducing, in 2020, at about 10% reduction. When the pandemic started, we decided to rethink our strategy. Our August numbers, we are in a structural reduction of 30% of the inventory we used to have. So this leads me to answer the second part of your question as to the competition scenario and looking at Q3 and Q4. So when we got to the objective that we wanted in terms of structural reduction of inventory, and today, we no longer need to have so many promotions as we used to have in the beginning of the pandemic.

Secondly, now we are going to do. And obviously, the market is still very competitive. But we are going to have more specific things for some special products that we want to correct here or there. So more specifically, we're talking about our winter products and with a significant reduction. But this is what we are going to keep. So this leads to a position that is also a part of our strategy, which after in Q4, we will be able to demonstrate to the market a significant recovery of the company's gross margin going back to the levels that we had originally planned for 2020. And so this was going to be the year of our -- the recovery of our profitability, and we are regaining -- prepared to do that.

So if Q3 -- we still have the impact of competitiveness. And especially towards the end of August and September and already showing a difference, and we expect Q4 to already show a positive -- significant change with that regard.

Now I give the floor to Adalberto, to talk about -- to answer your question.

[Adalberto Dos Santos, executive]

So first, so the legacy SG&A, of course, is a significant part of this work that -- or beyond our control will depend on others. It's the contract negotiation as a whole. And we have seen that it is very, very efficient in terms of our -- about the parties in terms of sitting down and renegotiating. But being conservative and looking into next year, our expectation is to have a structural drop of SG&A of 5% to 8% as compared to 2019. So this, again, being very conservative considering that most of the work is being done and only depend on our work. So between 5% and 8% reduction in structural SG&A next year.

So -- and as I mentioned, the reduction is related to the mathematical effect as you see overdue numbers. So if we look at our portfolio, you can see that as compared to the past, it's not a material growth, especially in terms of personal loans, it's 10 -- 12% as compared to last year. And as the portfolio we segmented again, and it's back to normal. This happens very quickly, considering our inventory reduction strategies, and this percentage is likely to go back to normal levels.

Before the COVID crisis, the technical team of our financial products had decided or completed the implementation of a machine learning system. And so we are being more restricted but we are not going to reduce materially the concession because we want to be more assertive. So the effect that we are likely to have is the quick normalization along Q3 and 4. And next year, we are likely to have levels that are even better than those of 2019 in terms of the loss of our portfolio.

[Operator]

[Operator Instructions] We have another question from [indiscernible] from Sul América.

[Unknown Analyst]

On your presentation, you said a gain in market share as compared to the competition. Could you talk about that? Is that more on street stores or not?

[Unknown Executive]

We're seeing 2 scenarios, especially in street stores, and we've been noticing that. Marisa has the feature of having 50% of its stores in streets and 50% in shopping malls. So one of the things that we've been noticing is that the strengthening of street stores, especially with many visional players not going back to operation. And then the consequence of the pandemic has caused this effect, which, on the other hand, has given us the opportunity of having a consolidated growth in street stores.

What we are seeing, this resumption. And since April or May when we started, it has been becoming more significant as this number of performance of street stores hasn't changed any in practice. If we take August with positive sales as compared to the year before, I think that Marisa is well positioned to make the most of that.

And as our digital strategy, especially within a click and pickup, so our store are very well positioned in terms -- very close to public transportation hubs. So going back, the resumption of the click and pickup is doing very well. And of course, this is related to the great work of our store teams, also working in the repurchase process, which today is above 30%. So we are confident that our strategy and our positioning of -- offering fashion and quality, this will strengthen our positioning.

[Unknown Analyst]

If you allow me to ask another question, it's about online or digital sales. What do you expect for next year in terms of the share of digital sales as part of the overall sales of the company?

[Unknown Executive]

Well, there are a few things regarding digital. Obviously, excluding the COVID effect, we are in excess of 10% this year. And next year, our plan is to be at least 15% of total sales of the organization, and especially because of the strategy of underwear as the gateway. So one of the goals of this year was to consolidate underwear. So our numbers demonstrate a compliance of our customers to this channel. And the best thing for us is that through the underwear hot site, it's a great gateway into the website as a whole.

We are seeing a lot of conversion, people that go through underwear and end up buying the other categories, too. And also an important aspect, which is the multiplicity of customers and profile, especially more wealthy customers going through underwear. So what we expect next year is that it will account for 15% of our total sales.

[Operator]

[Operator Instructions] Thiago [indiscernible] has posted a question about our partnership with Magazine Luiza.

[Unknown Executive]

The partnership is intact Thiago. And obviously, during the -- pandemic interrupted the actions in the kiosks. We have gone back to it, and we are going to close September with all our street stores, it's already installed. So all the stores with the kiosks, we have already exceeded 80 right now, and we'll double that number before the end of September, and then we go to other stores. But our expectation is to move forward. Well, we had an interruption because of the pandemic, and now we are resuming it as planned.

[Operator]

[Operator Instructions] I have another question from Felipe Cassimiro from HSBC about Magazine Luiza to complement customer behavior in July and August. And also about cross-selling.

[Unknown Executive]

Felipe, the behavior in August and the end of July -- late July and August has exceeded our expectations. And as we mentioned today, we are very close to 100% as compared to our forecast. As to cross-selling, we are doing very well, both on click and pickup, above 30%. We also have repurchase metrics for the payment of invoices. So people go back, and this is going back to levels that are very close to last year, then we have work of purchase. For customers today, it is very close and 50% above percentages of the year before.

As to cross-selling categories. Women who come to buy traditionally women's products. We have a highlight, as we've been saying to some of you, especially for children's clothes with a very solid growth, and men's clothes and accessories are also coming up at interesting levels in many different channels.

Men's clothes is doing really well in marketplace and children's in stores and digital and accessories, too. So we are very optimistic, especially in the recovery and the growing back because once these stores will open, we are being able to make the most of the customers that come to our stores.

[Operator]

[Operator Instructions] Okay. Now we end our questions-and-answers session. So I would like to give the floor back to Mr. Pimentel for his closing remarks. Mr. Pimentel, please.

[Marcelo Pimentel, executive]

Thank you, everyone, for your presence, for your participation. I would like to repeat again and stress our commitment as a company for the strong and structured recovery of our sales focus on resumption or going recovery of our gross margin and our absolute focus in a low cost operation, which, as a consequence, will provide us the results that we expected to attain in 2020, which, unfortunately, has suffered from the pandemic. We didn't deliver in full, but we are working very high so that in Q4 and certainly in 2021, we will be able to reach those targets.

There are many people from Marisa here listening to us. So I would like to thank everybody for the very solid work that we have been doing, and will continue to do over the next few quarters. Thank you all very much.

[Operator]

So Marisa's conference call has now ended. We thank you very much for your participation, and have a very good afternoon.

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