Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, and thank you for waiting. Welcome for the conference call of Marisa to discuss the earnings concerning Q3 2018.

We would like to inform that this event is being recorded and is available on Marisa's IR website. [Operator Instructions]

Before proceeding, we'd like to clarify that forward-looking statements are based on the beliefs and assumptions of Marisa's management and on the information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events. They are not guarantees of performance. They involve risks, uncertainties and assumptions. They relate to future events and therefore, depend on circumstances that may or may not occur. 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 Investor Relations Officer, who will start the presentation.

Mr. Adalberto, you may begin the conference.

[Adalberto Dos Santos, executive]

Good afternoon. Thank you for participating in our conference call for Q3 '18. I have with me, Marcio Goldfarb; Célio Lopes, Leader in PSF, Marco Muraro, Leader of Sales; and Marcelo Pimentel, responsible for Operations; and also Karina Lorenzo, responsible for Investor Relations.

Before going on to the presentation, I would like to make some comments concerning the results in the period. As you can see in the release, slow sales, low -- with a negative flow in the stores also with -- and both in retail and PSF. In terms of another quarter, the company decided to revisit its strategy, which resulted in the decision to discontinue 16 stores, close 16 stores.

We have more and more focus to improve products and also the experience inside the store. Also in e-commerce, we had a project, it is being tested with initial results that are very positive. Also, cash position positive. Comfortable cash position and leverage well below the limits.

Finally, after closing excellent news concerning the tax issues that were in court, this should guarantee the future important tax credits and an important cash generation.

Now we'd like to go to the -- on to the presentation, chart number -- Slide #2, please. Talking about net revenue and same-store sales. On the upper graph bar chart, a drop of 2.8% in net revenue in retail. I explained the flow, especially in the month of June due to the World Cup. During the next month, a better performance with positive outlook and good acceptance of the new collection. E-commerce, a growth of 38% in relation to the same period last year.

Now in the quarter, if you look at the lower graph at the bottom, you can see the comparison, 16.9%, which makes the challenge greater. Next page, here gross profit and margin, we see here a drop due to slow sales and compression in margins. We are working on inventory.

Page 4, SG&A, a small growth, 3.6%, basically due to expenses with sales, which went up 6.5%. We made greater investments in marketing and also, lower discounts in rent as announced last year. A drop of 9.2% in G&A is due to the asymmetry of the comparable base. We had nonrecurring expenses in Q3, once we had nonrecurring events in the comparison in Q3 '17. Also, G&A did a growth of 12% due to reinforcement retail.

Adjusted EBITDA increased by BRL 21.4 million. Although lower revenue in retail, EBITDA was -- had a positive impact due to growth in tax credits. PSF contribution margin, we had at Slide #6, the results had an impact especially due to the penetration of Marisa credit card and lower sales in retail. Higher level of losses due to reversals, also greater financial leverage intentionally to have a better financial and tax efficiency.

We're operating with third-party capitals instead of using our own capital, as we did in the past. Co-branded, a growth of 24.7%.

Next, Chart #7. Here, evolution of EBITDA. PSF, so lower results of the contribution, especially PL and EP, and gains -- continuous gains in efficiency in costs and expenses with a drop of 4%.

Chart -- Slide #8, the evolution of private label. On the upper chart, we see here the losses from 8% to 9.7%. As I mentioned, a little higher, but we are already reversing this and this happened in October. Here too, we see at the bottom a drop. There is the indicator here shows it is below historical levels. EFFICC, here, we are already reversing this. In the next Slide #9, personal loans also with a higher level of losses, we see the index of delinquency had a greater impact, but still in comfortable historical levels.

We are changing this. We are reversing this. You can see at the bottom. On Slide #10, company's adjusted EBITDA. Here, consolidated retail. So we see here a growth of 10.2%. Consolidated adjusted EBITDA. We can -- it is anchored based on tax credits, tax recovery.

On Slide #11, evolution of net revenue. The upper chart on the right, upper right corner, results. Consolidated net, you can see here, we have better financial results due to lower financial expenses, negative impact of reversal of tax credits. And here we see cash flow negative, but better than last year. On the lower chart, evolution of cash flow. The highlight, operational generation, very positive, in spite of the negative EBITDA.

Here at the top, you can see BRL 189 million, BRL 127 million in year-to-date and BRL 53 million negative. Then operational cash generation from BRL 53 million negative to BRL 39 million positive, positive impact with better more adequate inventory levels. And here, we see here a confirmation. We see the net debt from here also very -- we see the net debt BRL 546 million to BRL 599 million. And you can see here, we had 2.8%, now the leverage 2.3%.

So now we would like to begin the Q&A session and we're here to make clarifications.

[Operator]

[Operator Instructions]

[Adalberto Dos Santos, executive]

We have a question from Mr. Jacob about rents. Why we are showing here a drop? We are being able to maintain the prices. This was very relevant. We had a very efficient negotiation for rent in the beginning of 2017. It was very important for our results, but part of them were temporary discounts in rent. So once again, 70% was maintained. If you look at the rent paid in 2018 and compare with 2016, we're below 2016 in terms of rent.

[Operator]

Our first question comes from Mrs. Helena, Bradesco BBI.

[Helena Villares, analyst]

I'd like to understand the retail operation. What do you see for Q4? So I believe that it should improve soon. So what is correct? What do you believe is not working? Do you have changes to be made? Do you have changes in the format of the stores? And also, in Q3, we saw a drop in the participation of the Marisa credit card. Do you see it catch up? Do you think -- or is it a strategy? Or did you withhold credit to avoid losses? So how do you see the situation in Q4?

[Adalberto Dos Santos, executive]

Helena, Adalberto again. Thank you. What we're seeing in the results in Q4, basically a continuation of what we saw in the last 2 months of Q3. The collections are having a positive acceptance. We see this through surveys and also feedback from store personnel and clients and the turnover shows this. The point is that from -- the company is going through a great change -- great changes. Looking at my crew, we continue working with a favorable situation. We have a lot of unemployment in the economy, in the country, a very high unemployment. And when we check the flow in our stores and unemployment, so we're working in this environment in spite of products with better acceptance, this is not -- this doesn't happen for 100% of the collection. Now we will be reaching in November the peak of 100%. In spite of this, we are rebalancing the inventory. It is in progress. And we have a balance that we have to sell, the balance of the inventory. Our sales strategy is being changed. In 2016, '17, due to the low quality of the collections, we had to do promotions one after the other. And this brought the type of clients that focused only on clients. Now, we're having clients focusing on fashion. We reached this in the first semester. So now you have seen that we had many promotions. The objective was to have a promotion, for example, pay for 2 and take 3 and then a period without promotions. Clients came back because they liked our products, our fashion. So we're now in this phase, but we still have the bridge. Until there, we expect a gradual recovery in sales. We have strong signs that the collection is okay, very well accepted, we're on the right track, but we have some negative issues that we have to overcome. Now we have -- we spent the last 4 years with -- no, we had a growth quarter-after-quarter, drop in expenses. From what I remember, it is the first time that we have a drop in results. It's a structural issue. It should continue affecting, we have more leverage and we -- this will change. We have a gradual recovery of the participation of the credit card. We should accelerate this by selling other products. We're working on this.

[Operator]

[Operator Instructions] [ Mr. Anderson Baretto ] from [ Murphy ] would like to ask a question.

[Unknown Analyst]

For the next quarter, do you expect to have higher expenses in sales?

[Adalberto Dos Santos, executive]

Anderson, the company is working to maintain SG&A expenses under control. Sometimes you have a drop in this line in expenses with marketing, has to do with motivation of the sales team and this is part of our strategy to recover and grow. We try to keep it stable, maximum, for example, an increase that is under inflation.

[Operator]

[Operator Instructions] We have a question from Lucas from [indiscernible] Investments.

[Adalberto Dos Santos, executive]

The question is about PIS/Cofins taxes. We had mentioned with analysts and investors about a positive evolution of this issue. It was decided in court and it benefited the company. This is the largest part of the lawsuit to recover taxes. The other parts was decided. Since our lawsuit is different, it has a different treatment on the part of the IRS. It was already certified. Once again, it's a different lawsuit with a different treatment on the part of the IRS. So we had a decision and it benefits the company and thus, our credits income, tax credits will be certified. This is very important for the company, especially at this time.

[Operator]

[Operator Instructions] [ Mr. Felipe Casemiro ] from HSBC would like to ask a question.

[Unknown Analyst]

Concerning the closing of stores, 16 stores were closed this year and in the future, do you intend to close more stores? Do you have any numbers for 2019? And the second question, e-commerce. Give us more details about the evolution of this channel, e-commerce? Is it accelerating? So give us an idea of the relevance of e-commerce for retail sales?

[Adalberto Dos Santos, executive]

Felipe, let's talk about e-commerce, it's doing very well. We had an acceleration in comparison with the beginning of the year. We made an important investment on the e-commerce platform. We have a director for this area, marketing specifically for e-commerce. So we have given special attention. There is no way to segregate this from multichannel. Both have given us positive signs. We don't want to give you the numbers because it is in the test phase. As soon as it stabilizes, we will give you the numbers. But all the signs we see, especially with the pilot, are very positive. An increase in conversion, capturing new clients through e-commerce, very positive e-commerce. So in the next calls, we will give you more details. Let's wait until it stabilizes. Concerning closing stores, we have no plans to close more stores. We do this due to the recovery. Sometimes, we have to do this to protect margins by decreasing expenses. There is a guidance on the part of the Council to accelerate the recovery of the profitability. We are working on this in order to recovery effective profitability. So we have a fourth year of negative bottom line. This is considered unacceptable by the Council. So we're working to go back to profitability. So these stores that we closed, this is in order to make the network more lean.

[Unknown Analyst]

A question on the evolution of sales. The last few months were better than July, the sales. What is the outlook for Q4? Especially, did you see any change in behavior after the elections?

[Adalberto Dos Santos, executive]

Yes, a lot of variability. We can't say that -- there are some positive signs and some negative signs. We can't say that there is a turnaround and unfortunately, not yet.

[Operator]

[Operator Instructions]

[Adalberto Dos Santos, executive]

Another question via webcast. Mr [indiscernible] the credit of BRL 780 million, will it used in Q4? In principal, yes. Both the definition of the value, the credits and the definition, it is not up to us. We're following accounting rules. So concerning the relevance, the company is obliged to disclose and it's not up to us. We should recognize these tax credits in October, actually, in November -- in November. This should happen in November.

[Operator]

[Operator Instructions] We'd like to conclude the Q&A session. And now I would like to pass the floor to Mr. Adalberto Dos Santos for his final comments.

[Adalberto Dos Santos, executive]

We'd like to thank you all for participating in our conference call. We invite you to access our website, Investor Relations. We have excellent promotions on -- for Black Friday and please visit our stores and get to know our collections. Thank you.

[Operator]

Marisa's conference call has ended. We thank you all for participating and we wish you good afternoon.